Is the owner willing to reinvest in their company after the sale? We ask this obvious but important question early in every process. Reinvestment is not a decision to take lightly, and not one to make at the eleventh hour. An owner should start thinking about it as early as possible, ideally well before the process begins, and be clear about their reasons and the ramifications as the sale unfolds.
Owner reinvestment, also known as rollover equity, has been written about endlessly, usually with second-bite-at-the-apple language and the standard checklist: investing with pre- or post-tax proceeds, minority investor rights, anti-dilution rights, repurchase rights on termination, voting rights, restrictive covenants, and so on. We will take a slightly different angle and focus on the less-discussed aspects: the role of the owner's age and ownership horizon, the impact on the buyer universe, target net proceeds against the owner's objectives, and post-sale capital calls.
For the unfamiliar, rollover equity means the owner rolls a portion of their sale proceeds back into the company in exchange for a minority stake, usually between 10% and 49%, in the new company after closing.
Why rollover equity can appeal to both sides
The sale de-risks the owner's net worth, while the rollover lets the seller keep benefiting from future appreciation.
Reinvesting aligns the buyer's and seller's interests after the sale.
The valuation may only be realizable if the owner reinvests; the company can be worth less if they do not.
It can represent a meaningful part of the deal when pricing is aggressive or there is a gap in valuation between the parties.
It functions in part as seller financing, reducing the buyer's up-front investment.
What the owner should weigh
Ownership horizon
The seller's risk profile is shaped by their age and their other assets. An owner of 68 who is ready to retire may be more risk averse and less inclined to reinvest than an owner in their 50s who wants to keep some skin in the game. A longer horizon often means a more aggressive rollover strategy and an active role in management after the sale, with the chance to let some of the money ride and reap the rewards later.
Impact on the buyer universe
A privately-held corporate buyer that is not private-equity-backed usually wants 100% of the target and will not offer reinvestment. Public companies can use stock as currency. Private equity groups are far more likely to want the owner to reinvest, and many will not pursue a deal unless the seller rolls a meaningful amount, especially for a new platform. Flexibility on reinvestment widens the buyer universe; rigidity narrows it.
Net proceeds objective
Reinvesting can create upside, but the owner must confirm they still hit their net proceeds objective after rolling equity. If the goal is $10 million after tax, only proceeds above $10 million should go into the rollover. If the objective is not achievable that way, the owner may need buyers that require less reinvestment, or may need to revisit whether the objective is realistic.
Potential capital calls
If the buyer is acquisitive, as private equity groups tend to be, the owner may be asked to fund a share of future acquisitions. The owner can decline and accept dilution, but the potential for capital calls should be vetted up front, so they are not caught between investing more than intended and owning less than they want. If calls are likely, keep dry powder on hand.
Rolling equity is a complex decision with near- and long-term consequences, so make it early, in line with your time horizon, age, objectives, and buyer preference. Do you want to leave proceeds at risk by reinvesting? Can you stomach it given your risk tolerance, and for how long? Can you be partners with the buyer afterward? Go into the process ready to answer these questions, and if you proceed, make sure you understand the likely outcomes, good or bad.
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